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GAO's Long-Term Federal Budget Outlook Shows Grave Picture

May 8, 2014

The Government Accountability Office (GAO) recently released the spring update to its long-term federal budget simulation series. In their report, GAO produces simulations from 2014-2088 under two sets of assumptions, a Baseline Extended and an Alternative Scenario. These simulations show fiscal conditions under different sets of policy options.

Their baseline extended simulation uses the Congressional Budget Office's (CBO) February 2014 current law baseline projections. CBO assumes discretionary spending caps will be upheld, expiring tax provisions (such as the tax extenders) will not be renewed, and that Medicare payments to doctors will be cut as scheduled under the current law Sustainable Growth Rate (SGR) formula. While these are currently the law, historical experience indicates these events may not necessarily happen, which would result in higher debt.

Their alternative scenario demonstrates more realistic assumptions based on historical trends. Discretionary spending rises gradually to the historical average of 7.3 percent of GDP after 2021 and revenue returns to its 40-year average of 17.4 percent of GDP after 2024. Additionally, GAO assumes that Medicare physician payments grow at 0.7 percent annually (the average growth in the past ten years), and other mandatory spending is held constant as a share of GDP, whereas in the baseline extended it gradually declines as a share of GDP.

Compared to other projections, GAO's baseline extended is within the range of scenarios CRFB outlined, albeit on the pessimistic side. Meanwhile, the alternative scenario is far more pessimistic than we envision, in part because of their assumptions about revenue and discretionary spending returning to their historical averages.